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Observations Regarding the July 2018 Employment Situation

Posted August 7th, 2018

By Steven R. Drexel, President and CEO of the Cornerstone Staffing Solutions, Inc. family of companies

Overview

On Friday August 3rd, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering July 2018. The recent economic data has been pretty positive (with second quarter GDP growing at 4.1 percent and inflation still restrained). Therefore, employment growth was expected to confirm the recent good news. On balance, it was a mixed employment report. Jobs growth was slower than expected, but the unemployment rate declined by a tenth and the ‘change in average hourly earnings’ remained constant.

Jobs Growth At-a-Glance

The all-important jobs growth number at 157,000 net new positions was mildly softer than the 190,000 expectation. This modest disappointment was alleviated by the knowledge that revisions to the prior two months added another 59,000 jobs to the total. Therefore, the three-month moving average was a remarkable 224,000 net new positions — which can’t be viewed as anything short of impressive. Moreover, the household survey, a smaller and more volatile series, indicated that employment grew by 389,000 positions. The industry detail was also reassuring in that the biggest shortfalls during July were in government and specialty retail stores which caught the brunt of the Toys R Us closings. Neither of these shortfalls are expected to be repeated going forward.

Unemployment Rate Update

The unemployment rate decreased by one tenth of a point to 3.9 percent. This was within the reasonably narrow range that unemployment has occupied for nine months. The unemployment rate is quite low by any historical standard but the notion that it is not moving south at a fast clip suggests that the labor force is still expanding at an accommodating rate allowing employment to grow in order to continue to support the expanding economy. A really reassuring note in terms of the sustainability of the expansion.

Wage Rate Influencers

Average hourly earnings during July indicated that wages grew by 2.7 percent on a year-over-year basis, unchanged compared to June and recent months. This remains surprising because during previous economic expansions, when the unemployment rate was below 4.0 percent, growth in wage rates exceeded 4.0 percent. It is unfortunate that workers have not seen stronger wage gains during this long expansion and painful to observe that this month the rate of general price inflation wiped out any real income gains for the average worker. On the other hand, it is often higher wage inflation that sets off a series of events that leads to a recession. There is some consolation in that, in exchange for lower wage growth, employment has grown for a record number of months and unemployment across many dimensions is at or near a 17-year low.

The causes of weak wage growth include the observation that productivity growth during this recovery has been unusually weak. Historically, improvements in wages, as well as the overall standard of living, are highly dependent on productivity growth. A second explanation for the relatively weak wage growth involves demographic changes. As the large generation of baby boomers, at relatively high pay rates, retire and are replaced by newer, less experienced, entrants into the labor force, this depresses the growth in the average wage. Further, the baby boomers still represent a large segment of the workforce and at this point in their careers, they tend to trade off pay increases for things they care more about like job security, time-based flexibility as well as other quality of life factors. A third factor suppressing wage growth is the effect of global competition which theorizes that work shifts to lower wage locations when domestic wages grow at a faster rate than our global challengers.

Measures of Labor Availability

Isolating the prime-age workers (between 25 and 54 years old) eliminates the influence of the aging baby boomers that cause the workforce to be on average older, likely suppressing the aggregate rates of employment and participation. Focusing on prime-age workers also corrects for the younger segments of the population who continue in school or career training. The median duration of unemployment provides insight into how easy it is for unemployed workers to re-enter the workforce. Collectively, these less-followed series can provide insight into the capacity of the labor force or its ability to continue growing despite the long-running expansion and low unemployment:

The labor force participation rate for prime-age workers increased by one-tenth of a point to 82.1 percent, this is still below the high of 83.4 percent at the end of the last expansion during January of 2007;

Seventy-nine point five (79.5) percent of prime-age workers were employed during July, up slightly from June, yet still below the 80.3 percent peak during the previous expansion – also in January 2007; and

The median duration of unemployment increased slightly to 9.5 weeks during July. This was still elevated compared to the 7.3-week duration that was the lowest point of the last expansion during June of 2006.

Industry Sector Details

The industry sector metrics remained strong as 64.0 percent of the detailed industries grew during July which was still weaker than June or May’s metrics – which were closer to 70 percent.

Changes in employment by major industry segment included the following:

Professional and business services (+51k) – including temporary help, consistently strong;

Leisure and hospitality (+40.0k) – better than average, often seasonal;

Retail trade (+7.1k) – better this month in aggregate but a sector under serious digital stress;

Information (+0.0k) – better than typical;

Transportation and warehousing (-1.3k) – much weaker than average during July;

Mining (-3.8k) – unusually negative compared to recent months;

Financial activities (-5.0k) – a soft month; and

Government (-13k) – unusually weak but based on local education so perhaps an anomaly.

Employment Situation Retrospective

In summary, while the BLS Employment Situation Report for July was expected to be solid, the actual results were mixed but on balance reassuring. This result is consistent with other public and private employment statistics including initial and continuing jobless claims, job openings, consumer and business confidence, announcements layoffs, hiring plans and supply manager’s employment indexes which all tend to confirm that the labor market remains enduringly, and remarkably robust. The unemployment rate is quite low but relatively stable. Average hourly earnings are still growing at a muted rate and together with labor force/employment participation rates and duration of unemployment statistics indicate that the labor market while strong and enduring, is not overheating.

The broader economy is enjoying a combination of favorable dynamics including improving global growth, a new dose of fiscal stimulus (tax cuts and increased federal spending), and slowly but not alarmingly rising inflation. Consumer and business confidence has softened but remains high. The near-term outlook is positive. Over the longer term, trade tensions, growing government deficits and uneven income distribution loom as potentially serious policy challenges.

The current expansion has endured now into its tenth year (compared to an average expansion of five or six years). This is likely the pay-back for suffering the most recent historically severe, financial crisis-induced recession as well as a slow-growth recovery. The expansion still looks to continue through the end of the decade.

Expect jobs growth during 2018 to average around 200,000 positions per month while the unemployment rate trends down to around 3.5 percent by year-end. The near-term risk of recession remains low given the absence of any critically growing imbalances or a looming financial shock.

Word on the street

In the world of recruitment, staffing and employment services, there are no emerging signs of weakness in demand; it is supply, or the skills shortage, that remains our challenge. The BLS estimates year-over-year employment growth at 3.3 percent, while the American Staffing Association reports 2.8 percent employment growth – both slightly improved during July. Employment growth is unexciting, but wage and margin improvement as well as more search and placement fees supports better results. Wage rates, particularly at the cutting edge, are growing faster than the statistical economic reports suggest. Fill ratios are lower and time to fill metrics are slower, so staffing companies can be more selective in the positions that they choose to fill. Workers, feeling more confident, are more willing to try a new position if it offers a better perceived opportunity.

Please feel free to contact me if you have any questions or comments.

More about Cornerstone Staffing Solutions

Cornerstone Staffing Solutions is among the largest staffing firms in America and received Inavero’s Best of Staffing® Client Award in 2016, 2017 and 2018. Since 2003, Cornerstone has grown from a neighborhood staffing provider to a national firm that employs thousands of people at hundreds of companies from coast to coast. The Cornerstone family of companies also includes Dallas, Texas-based RightStone (www.rightstone.com), and Chicago, Illinois-based Arlington Resources, Inc. (www.arlingtonresources.com) and Casey Accounting & Finance Resources (www.caseyresources.com). Providing candidate searching and job placement for administrative, industrial, technical, sales and transportation positions, Cornerstone truly is where talent and jobs meet. Visit Cornerstone at: http://www.cornerstone-staffing.com.